The 2026 Update: What's New for Social Security and Taxes
- Marc Lowe
- Jun 11
- 4 min read
For the past few years, retirees have grown accustomed to large Social Security cost-of-living adjustments (COLAs) as inflation surged. Those days appear to be behind us.
With inflation cooling, the 2026 Social Security increase is much smaller. While any increase is welcome, retirees should pay attention to more than just the size of their monthly check. The bigger opportunity often lies in understanding how Social Security fits into your overall retirement income and tax strategy.
A Smaller COLA in 2026
The Social Security COLA for 2026 is 2.8%, increasing the average retired worker's monthly benefit by about $57. The average benefit will rise to approximately $2,072 per month.
For those planning to retire in 2026, there's another positive development. The maximum Social Security benefit at Full Retirement Age (FRA) increases to $4,152 per month, up from $4,018 in 2025.
While these increases provide additional income, they can also create unintended tax consequences if not carefully coordinated with the rest of your retirement plan.
How Social Security Benefits Are Taxed
Many retirees are surprised to learn that Social Security benefits can be taxable.
For individual filers:
Combined income between $25,000 and $34,000 may result in up to 50% of benefits being taxable.
Combined income above $34,000 may result in up to 85% of benefits being taxable.
Combined income between $32,000 and $44,000 may result in up to 50% of benefits being taxable.
Combined income above $44,000 may result in up to 85% of benefits being taxable.
The key word here is combined income. Withdrawals from traditional IRAs, 401(k)s, pensions, interest income, and even some investment income can push you into higher taxation thresholds.
Working During Retirement?
Many people retire before reaching Full Retirement Age and continue working part-time. Whether it's for extra income, staying active, or pursuing a passion project, working can affect Social Security benefits before FRA.
In 2026, if you're under Full Retirement Age for the entire year, Social Security will withhold $1 in benefits for every $2 earned above $24,480.
If you reach FRA during 2026, the rules become more favorable. Benefits are reduced by $1 for every $3 earned above $65,160 before reaching FRA.
Once you reach Full Retirement Age, there is no earnings limit. You can earn as much as you want without reducing your Social Security benefits.
The Tax Planning Opportunity Most Retirees Miss
Retirement income typically comes from multiple sources:
Social Security
Pensions
Traditional IRAs and 401(k)s
Roth accounts
Taxable investment accounts
Savings and interest income
The source of your income matters just as much as the amount.
Many retirees focus on maximizing income but overlook how different income sources are taxed. That's where proactive planning can make a significant difference.
For example, retirees in their early retirement years may have an opportunity to complete Roth conversions while remaining in lower tax brackets. Although taxes are paid on the converted amount today, future growth and withdrawals can be tax-free.
We've worked with Connecticut retirees who were able to reduce future Required Minimum Distributions (RMDs), lower the taxation of Social Security benefits, and create greater flexibility later in retirement through thoughtful Roth conversion strategies.
The challenge is coordination. A Social Security increase, higher interest rates on savings, IRA withdrawals, and investment income can combine to push you into a higher tax bracket or increase the portion of Social Security subject to taxation.
For retirees receiving Affordable Care Act subsidies before Medicare eligibility, higher income can also reduce or eliminate valuable premium assistance.
The Bottom Line
The 2026 Social Security increase may be modest, but it highlights a larger issue: retirement income planning isn't just about how much you receive—it's about how much you keep.
Social Security, retirement account withdrawals, investment income, taxes, and healthcare costs all work together. Making smart decisions about when and where to draw income can help reduce taxes and potentially increase the amount you keep over your lifetime.
As retirement approaches, it's worth looking beyond the COLA announcement and focusing on a coordinated retirement income strategy that helps your money work harder for you.
About the Author
Marc Lowe, CFP® is a fee-only fiduciary advisor based in Waterford, CT, helping small business owners & families make smarter financial decisions.
The information presented in this article is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through In The Money Retirement, an investment adviser registered with the state of Connecticut. The information linked to on third-party sites is being provided strictly as a courtesy and convenience. We make no representation as to the completeness or accuracy of information provided at these websites. When you access these websites, you are leaving our website and assume any and all responsibility and risk for use of the web sites you are visiting.The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.
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